ECONOMYNEXT – Sri Lanka’s political and social instability was a key disadvantage in the investment environment of Sri Lanka followed by unclear policy management and currency volatility, according to a survey of Japanese firms.
The most frequently cited disadvantage was ‘political or social instability’ with 93.5 percent of the firms coming up with the reason, in a survey by the Japan External Trade Organization.
The next most cited disadvantage was unclear policy management by local government (77.4 percent) and currency volatility (58.1 percent).
Insufficient infrastructure of electric power was cited by 45.2 percent of firms and increased labour costs by 32.3 percent of respondents.
Underdeveloped supply chains were also an issue, with only 20.8 percent of companies saying that they procure raw materials and parts from Sri Lanka.
Only 8.3 percent firms said that they will expand procurement from Sri Lanka over the next year or two.
A key advantage cited by 60 percent of the firms was low labour costs followed by ‘fewer linguistic/ communication problems’ by 53.3 percent, growth potential (30 percent0 and ‘good living environment for Japanese expatriates’ (30 percent) and ease of recruiting local staff (26.7 percent).
Most Japanese firms had been hit by an economic crisis in Sri Lanka with fuel shortages (82.6-pct), currency depreciation (60.9 percent), power cuts (60.9 percent) and income tax and other tax increases (60.9 percent) being cited as negative impacts.
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However no Japanese company had decided to leave Sri Lanka.
Japanese firms were seeing gradual recovery from the crisis, with 33.3 percent saying their business had improved compared to last year, 50 percent saying it was unchanged and 16.7 percent saying it was unchanged.
Ending of ‘petrol and fuel shortages were cited by 75.0 percent of firms, ‘power cuts have been eliminated’ (75.0 percent), ‘logistics problems have been resolved’ (37.5 percent) and ‘price increases have settled’ (37.5 percent)
Other reasons for improvement were ‘orders from overseas clients recovering’, international credit improving due to an International Monetary Fund program, ending of import/export controls and better employee attendance.
About 12.5 percent had cited an improvement in exchange rate recovery.
Zero firms had responded about an improvement in ‘financial settlement’.
“This indicates a need to restore international financial confidence promptly through debt restructuring,” the statement said.
Sri Lanka suffered the worst currency collapse in the history of the central bank in 2022 after the most aggressive deployment of macro-economic policy involving money printing to cut rates and tax cuts to target potential output.
The JETRO survey has been conducted each year since 1987. The latest survey was conducted between August and September 2023. (Colombo/Jan07/2023)